Clarity On The Contracting Out Of Business Premises

The contracting-out of a business tenancy under the Landlord and Tenant Act 1954 (Act) has important ramifications for both landlords and tenants of commercial premises.

For the landlord, it provides flexibility in how they can deal with the premises without fear of the tenant being able to seek lease renewals and/or having to pay a premium for the termination of the tenancy. For the tenant, they are giving up important statutory rights to renew their tenancy and the end of its contractual term and so the process should always be approached with that in mind.

What is the contracting out of business premises procedure?

Unless a commercial lease is contracted out by following the procedure set out within Section 38A of the Act, the tenant will acquire “security of tenure”. This concept protects the tenant’s right to remain in occupation of the premises by giving them a right to renew following the expiration of the existing lease by effluxion of time.

However, both parties can agree to waive this protection provided the lease grants a fixed term and that the following procedural steps are taken before the lease is granted:

The form of the warning notice and declaration is set out in The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 and the tenant’s declaration should include a “term commencement date”. This is to ensure that they have given the correct “form” of declaration (i.e. statutory or simple) depending on the amount of days’ notice they were given. If either party does not follow the correct procedure, then the agreement to contract-out the tenancy may be invalid. The tenant would then have the benefit of renewal rights under the Act, including a right to compensation if the landlord seeks to oppose any renewal lease on any “no-fault” grounds such as redevelopment.

A common area for disputes is whether or not the requisite number of days’ notice has been given before the term commencement date to ensure that the contracting-out procedure has been properly followed. An example of a tenant arguing that the correct procedure was not followed can be seen in the following case:

TFS Stores Ltd v The Designer Retail Outlet Centres (Mansfield) General Partner Ltd (2019)

Case background

The Fragrance Shop, a retailer with over 200 shops in the UK, challenged the validity of its statutory declarations in relation to six commercial leases at various McArthur Glen outlet shopping centres. There were various factors the retailer argued about, one of which was that each statuary declaration required the exact date of completion of the new lease. The Fragrance Shop argued that the parties had therefore not complied with the correct procedure, meaning that the leases were not correctly contracted-out.

In 2019, the High Court dismissed these claims and the Court of Appeal upheld that decision in 2021. The contracting-out procedure is to ensure the tenant understands that they do not have any legal rights to stay on the premises after the lease has either expired or terminated. The purpose of the term commencement date is required to help identify the lease to be contracted out. However, it is not a firm requirement to specify the exact date of lease completion. The Fragrance Shop sought permission to appeal to the Supreme Court, but this was refused.

Commentary

Whilst the Supreme Court’s decision to refuse permission to appeal may provide some reassurance to landlords that their assets may be managed or sold with certainty over when tenancies will end, the TFS case highlights the importance of getting the right advice if you are considering granting (or entering into) a contracted-out lease. If the strict statutory process is not followed, the parties can find themselves in a position that they were not expecting, and, worst case, the landlord may have to pay a statutory premium (by way of compensation) to the tenant to achieve vacant possession.